Brazil Amends Tax Treatment of Derivatives

Brazil has established new rules for the financial transactions tax (IOF) as it applies to bonds and securities transactions (IOF-TVM) levied on derivatives contracts.

Decree 7,563/11 of September 15 amends Decree 6,306/07 (Dec. 14, 2007), or RIOF, which consolidates and regulates the general IOF rules. The amendments entered into force on September 16, the date of publication in the official gazette. (For prior coverage of previous amendments to the IOF rules, see Doc 2011-11583or 2011WTD 104-7.)

Generally, Decree 7,563/11 maintains the applicability of the IOF-TVM at a 1

percent rate upon the purchase, sale, or maturity of derivatives contracts. However, it establishes that the only derivatives contracts subject to the IOF-TVM are:

those that are carried out in Brazil; and

those that individually result in an increase of the short foreign exchange exposure or a reduction of the long foreign exchange exposure.

According to the new rules, the following amounts can be deducted from the daily calculated tax base:

the sum of the notional value, adjusted upon the purchase, sale, or maturity, of financial derivatives contracts — carried out in Brazil on the relevant day – that individually result in an increase of the net short exposure or a reduction of the net long foreign exchange exposure;

the adjusted net long foreign exchange exposure calculated on the previous

business day; and

the decrease of the net short foreign exchange exposure and the increase of the net long foreign exchange exposure in relation to the one, verified on the previous business day, not resulting from the purchase, sale or maturity of financial derivative contracts.

Under the terms of the new rules, the tax basis must be determined in U.S. dollars and converted into the national currency at the closing exchange rate published by the Central Bank of Brazil (PTAX).

Decree 7,563/11 also sets forth the possibility of transferring the liability for the determination and payment of the IOF-TVM in the following cases:

when the entities or institutions authorized to record the financial derivatives

contracts do not have the information necessary for calculating the tax basis,

including information from other entities authorized to register those contracts; or

when those entities do not have access to the financial resources of the taxpayer.

In those cases, the taxpayer resident or domiciled in Brazil, the legal representative of the taxpayer resident or domiciled abroad, or the relevant investment fund/club manager will be responsible for determining and paying the IOF/TVM.

Decree 7,563/11 also provides for the application of a zero rate IOF-TVM for transactions with financial derivatives contracts that are not carried out in Brazil or that do not result in an increase of the short foreign exchange exposure or a reduction of the long foreign exchange exposure.

The new rules maintain the 1 percent IOF-TVM tax rate applicable to derivatives, which will be levied on the adjusted notional value of financial derivatives contracts (tax basis) upon the purchase, sale, or maturity of those contracts. The rules also maintain that the holder of the derivatives contracts is the IOF-TVM taxpayer and the entities or institutions authorized to record those contracts are the tax collector agents.

For purposes of the levy of the IOF-TVM applicable to derivatives, Decree 7,563/11 also establishes the following concepts.

Adjusted Notional Value

The reference value of the contract (notional value) multiplied by the price variation of the derivative in relation to the price variation of the relevant foreign currency. In the case of partial purchase, sale, or maturity, the adjusted notional value will be determined proportionally.

Short Foreign Exchange Exposure

The sum of the adjusted notional value of the financial derivatives contracts that result in gains when there is an appreciation of the national currency in relation to the foreign currency, or in loss when there is a depreciation of the national currency in relation to the relevant foreign currency.

Long Foreign Exchange Exposure

The sum of the adjusted notional value of the financial derivatives contracts that result in loss when there is an appreciation of the national currency in relation to the foreign currency, or gains when there is a depreciation of the national currency in relation to the relevant foreign currency.

Net Short Foreign Exchange Exposure

The maximum value between zero and the difference between the short foreign exchange exposure and the long foreign exchange exposure.

Net Long Foreign Exchange Long Exposure

The maximum value between zero and the difference between the long foreign exchange exposure and the short foreign exchange exposure.

Adjusted Net Foreign Exchange Long Exposure

The maximum value between zero and the result of the difference between the long foreign exchange exposure plus $10 million and the short foreign exchange exposure.

Financial Derivatives Contract

A contract whose object relies on the exchange rate of a foreign currency in relation to the national currency, or on the interest rate associated with a foreign currency in relation to the national currency.

Date of Purchase, Sale, or Maturity

Date on which the foreign exchange exposure of the financial derivatives contract is (fully of partially) initiated or terminated by the establishment of the parameters that will guide the determination of the settlement value of the relevant contract.

Other Amendments

Decree 7,563/2011 also repeals:

article 9, Item VII; article 16, Item III; and article 23, Item II of the RIOF, which relate to the exemption granted to the executors of the Brazil-Bolivia gas pipeline; and

article 16, Item IV of the RIOF, which exempted from the IOF the foreign exchange transactions carried out with the purpose of paying for imported goods destined for enterprises in the northeast and the Amazon and considered to be of interest for the development of those regions.